Escaping Energy Poverty: An Assessment of the Energy Policy of India

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The Johns Hopkins University

ABSTRACT

There are enough signs in the academic literature to uncover one of the primary causes of sustained poverty: the lack of access to modern energy. Energy poverty is a crucial aspect of a modern standard of living. More importantly, there is a causality to be found between economic growth, human development and energy access throughout both the developed and developing world. India’s Electricity Act of 2003 aimed to lift the country out of poverty through increased private participation in the electric sector. However, recent figures indicate that approximately 45% of India’s rural households remain unelectrified. Because of these issues, this thesis aims to determine to which degree India’s energy policy has addressed the issue of energy poverty in India. First, this thesis evaluates the structure of India’s Electricity Act of 2003 and its relevance to energy poverty. Second, this thesis compares the level of energy access for the average Indian in 2003-2004 and 2011-2012 – creating two sets of data for the same group. Lastly, this thesis makes use of a case study. This section exposes why energy reform has been slow and provides the basis for recommendations.

Table of contents

Abstract

Contents

List of Figures

List of tables

  1. Introduction
    1. Rationale
    2. A description of the main topics to be addressed by the thesis
    3. Research methodology
  2. Energy poverty in India: theory and definitions
    1. A plethora of definitions
    2. Defining poverty
    3. Capability poverty
    4. What energy interventions should focus on
    5. Why energy poverty is important: linking energy poverty to development
    6. Why energy poverty is important: linking energy poverty to health
  3. Electricity reform in India: a brief history and the structure of the Indian Electricity Act, 2003
    1. A history of reform
    2. Indian Electricity Act, 2003
    3. Structural Shortcomings
  4. Analysis and results
    1. Electricity access
    2. Expenditure on biomass fuels
    3. Results
  5. Case study research
    1. The case of Orissa
    2. How poor governance is impeding reform
    3. Connecting corruption and poor governance to the Indian power sector
    4. The costs of poor governance on the Indian power sector
  6. Summary of findings and recommendations
    1. Summary
    2. Recommendations
    3. Recommendations for the future

References

  1. Appendices
    1. Appendix a: tables
    2. Appendix b: questionnaire of the IHDS

1. Introduction

 

  1. Rationale

There are enough signs in the academic literature (Birol, 2007, Gaye, 2007 pp. 3, Pachauri, & Spreng, 2004, Sagar, 2005) to uncover one of the primary causes of sustained poverty: the lack of access to modern energy. Energy poverty is a crucial aspect of a modern standard of living. More importantly, there is a causality to be found between economic growth, human development and energy access throughout both the developed and developing world (Stern, 1993, Gaye, 2007). Access to energy affects the local, regional and global environment with fundamental implications for the livelihood of the poor as there is a threshold of energy that is required to achieve economic growth and human development (Gaye, 2007, pp. 4). Energy services are important to facilitate to the provision of goods such as food, shelter, water, access to information and medical care. The absence of access to energy, on the other hand, results in poverty and curtails economic growth (Reddy e.a. 2000 pp. 8).

A declaration of the United Nations (UN) General Assembly reveals that the issue of energy poverty has come to attention of the highest levels of international governance, with the year 2012 declared as the “the International Year of Sustainable Energy for All’.” Despite this, forecasts on universal access to energy are still precarious and energy poverty remains a matter that divides the world because the poorest countries cannot keep up with the progress of the wealthiest. The issue remains so prevalent that it influences about a third of the world’s population, with approximately 1.3 billion people of the world remaining without access to electricity. Likewise, 2.5 billion people are still dependent on fuelwood and other traditional forms of biomass fuels to power their household and facilitate their income-generating activities (International Energy Agency, 2014a, pp. 1).

Most the world’s energy deprived population reside in rural areas in South Asia, with a particularly large number living in India. This is unlikely to change as new and planned generation is expected to primarily occur in industrial regions and cities, expanding the energy gap between the poor and the rich. The issue of energy poverty is becoming more and more salient. There is a large literature which shows that there is a strong correlation between modern energy access and socio-economic development. Addressing energy poverty would help India reach its development goals. Specifically, one of the main objectives of India’s Electricity Act (EA) of 2003 is the supply of electricity to all areas of the country (Electricity Act, 2003, section 3, 4, 5 and 6).

1.2 Research objective and justification

The goal of this thesis is to determine to what degree India’s energy policy has addressed energy poverty since it has called for its reform in 2003. Moreover, this thesis aims to shed light on the challenges faced in India with regards to energy consumption and exposing the obstacles which prevent effective policy reforms.  The academic literature exposes several problems concerning India’s energy policy and the Electricity Act of 2003. Despite these facts, no in depth studies have been published which evaluate the effects of the policy in terms of grid improvement and biomass fuel consumption.

This thesis aspires to advance beyond the existing literature by assessing the effects of the Indian Electricity Act on the level of energy poverty in India. Specifically, this research explores electricity access in the wider context of energy poverty and socio-economic development. This thesis focusses exclusively on the level of electricity access. The line of argument in this respect is threefold. First, universal electrification was the main objective of the Electricity Act of 2003. Second, other energy sources such as gas make up a small part of India’s energy mix in relative terms (The Energy and Resources Institute, 2017, pp. 15 & 22)[1]. Last, it limits the scope of the research.

In other words: to what extent has India’s energy policy helped to improve electricity access to end users in India since 2003?

This question is supported by addressing three main topics:

  • To what extent is India’s energy policy capable of improving electricity access in rural India?
  • To what extent has India’s energy policy increased the level of electricity access to end users in India?
  •  How can India’s energy policy be improved?

1.3 Research Methodology

The approach of this thesis is qualitative and quantitative to accommodate the descriptive-analytical nature of the research question (as suggested by Yin, 2006). The focus of this research is on policies for enabling access to modern energy carriers in India. The collection of empirical data and their analysis, along with policy analysis, form the core of the study.

First, this research lays out the definition of energy poverty. This definition is necessary to find out whether someone has emerged from energy poverty. The structure of the Indian government policy is then evaluated so that its relevance to energy poverty can be determined. Sources for this section include government policy documents, such as documents of the Ministry of New and Renewable Energy (Ministry of New and Renewable Energy, 2015) and reviews and critique of the policies within the academic discourse.

The Indian Human Development Survey

 

Second, this thesis uses a dataset to acquire information on the actual level of electricity access in India over time.  The dataset of this thesis is collected by a Living Standards Measurement Study (LSMS) called the India Human Development Survey (IHDS), which contains information from the annual collection of household consumption data from 1950 onwards. The IHDS includes information that is relevant to the issues addressed in this thesis. The IHDS contains information on levels of living, poverty and inequality in Indian households. The retrieved information is the product of direct interview questionnaires.

It must be noted that these household surveys are not specifically designed to gather data on the consumption of energy. This means that all the information derived from the surveys is estimated as it relies on the reliability and the accuracy of the respondents. However, there is proof in the academic discourse that indicates that the survey data are representative. A study of the Energy Sector Management Assistance Program of the World Bank suggests that the data on energy consumption in India collected by the NSSO is representative. This is because it correlates with the data gathered on the demand and supply of household fuels (ESMAP, 2010, pp. 75).

Explaining poverty through income or consumption

Relating any definition of poverty to statistical data is a complex task. There are several levels of the supply chain at which energy access can be measured:

  • Primary energy is the energy that is to be found within the natural resources of a country, such as crude oil, gas and uranium.
  • End use energy refers to the measure of energy that is used upon consumption by the consumer.
  • Useful energy refers to the content of energy that has been converted into the form that is required for energy consumption.
  • The demand by households for energy services.

The greatest explanatory power for this thesis is derived from the fourth level of analysis. However, it is not possible to quantify the demand of energy services into energy units because it is not possible to distinguish energy services from other services or goods. This is because energy services require several other factors to facilitate their delivery. Therefore, this thesis makes use of the third level of analysis and analyses the availability of useful energy.

The IHDS survey uses consumption values to identify an individual as poor and relates these levels to an absolute figure calculated by the Indian government. For example, the consumption variable “COPC” is constructed by aggregating data from 47 questions.

This thesis measures energy poverty through consumption data without relating this information to income data because income data brings about several issues. First, accurate estimates of income also require detailed information on assets and their returns (which is unavailable). Second, respondents often have incentives to understate figures related to income. Third, many households are likely to be confused by the definition of income as many do not keep track of the concept of income. This means that many respondents will be unable to accurately report on their profits from their farms or enterprises.

This problem could only be avoided by collecting data on all transactions and purchases for everyone who has a wage, including the self-employed. This is a particularly challenging task in countries with large households with members who rely on multiple income generating activities. This is an issue that has received attention before, as surveys based on income alone often produce results that are lower than those that are based on consumption. These persistent problems help explain why the Indian National Service Scheme (NSS) has shied away from any attempt that involves the collection of income data in their consumer expenditure surveys.

Consumption data

Data on the consumption of certain goods or services show who consumes how much of what and can be linked to exogenous forces such as price changes. These exogenous forces can be induced on purpose (such as by imposing policy) or they can be induced through external factors (such as fluctuations in world prices or changes in the weather). Consumption data is particularly useful as a direct indicator because consumption is a behavioral response in itself. This makes a very strong case for using estimates based on consumption and not income. Income also tends to fluctuate more in the poorer regions of the world and income is not an accurate reflection of the living standards of the respondent during times of fluctuations.

2.Energy poverty in India: theory and definitions

 

This chapter provides a definition of energy poverty along with an outline of energy poverty in the academic discourse. There is no universal definition of poverty and the definition of energy poverty has proven an even more complex concept to lay out into concrete terms. One of the problems that arises when searching for possible trends in the levels of energy poverty is that the elements of poverty are not easily quantified as energy poverty cannot be viewed as a universal and static concept. This produces an element of subjective interference. To minimize this element, it is important to justify the connection between the hypothesis and the data used in the analysis.

This chapter constructs a definition of energy poverty by dissecting the term. First, the definition of poverty is analyzed with a focus on the literature on capability poverty because there is a connection between energy and human capability. Second, a definition of energy poverty is constructed and connected to energy interventions. It is then argued that energy poverty can be measured by looking at the level of electricity access and by analyzing how the consumption of certain fuels of the energy ladder develop over time.

2.1 Defining poverty

Certain theories within the poverty discourse make a detailed connection between energy access and poverty levels. Poverty research requires two questions to be answered. The first question is concerned with finding out who is poor and the second question is concerned with finding out a way to aggregate the poverty gaps of individuals in order to evaluate the extent of poverty. Much work in the academic discourse relies almost exclusively on the factors income and consumption in their objective to identify the poor (Blank e.a., 1993, White, 1979), with only some research relying on wider factors such as human welfare.  The level of economic well-being is the product of the factors income and consumption and measures whether someone has enough income to consume a certain level of goods and services so that a certain level of human welfare is acquired.

Ultimately, all the definitions of poverty can be categorized as follows:

  • Poverty is having less than an objectively defined, absolute minimum. Work within this category relies on absolute figures to evaluate whether the basic needs of an individual can be met.
  • Poverty is having less than others in society. Work within this category, on the other hand, relies on absolute figures such as income and consumption in relation to others. Work within this category is often written to promote social equity by exposing the degree of unequal distribution of resources (Schwartzman: 1998).
  • Poverty is feeling you do not have enough to get along. This category is subjective and relies on both absolute and relative data. This category goes beyond the scope of this research.

2.2 Capability poverty

An alternative form of poverty measurement which is particularly useful for this thesis is the capability theory. This definition is geared toward factors other than consumption and income. Instead, capability poverty goes beyond these conventional explanations of poverty and draws on a multi-dimensional framework.

Capability theory was introduced by economist and philosopher Amartya Sen and further developed by philosopher Martha Nussbaum. It departs from development approaches that are based on measurements of material wealth (which look at factors such as GDP and household income) and asserts that quality of life encompasses much more than these objective figures. Instead, Sen and Nussbaum assert that social-economic development can only be measured by looking at the outputs of wider human flourishing and achievement. Specifically, two linked subjects are articulated: capabilities and functionings. Functionings include all the factors that determine to what extent an individual is capable of being productive, such as being able to stay in good (enough) health. Capabilities, on the other hand, are the opportunities an individual has to put their functionings to use (Sen, 1992, pp. 16, Nussbaum, 1993)).

The essence of their thesis is that all programs aimed at alleviating poverty should consider the capabilities of the individual and seek to measure these capabilities for evaluation. This means that poverty is articulated as a form of capability deprivation and that levels of inequality must always be measured in the realm of capabilities (Sen, 1992). The extent to which people are capable of producing outputs is a function of their functionings (such as personal health) and their capabilities (such as an environment that allows one to put their functionings to good use).

2.3 Energy within the capability realm

The capability theory is important because capabilities can be connected to levels of energy access. Energy is an input of several services which are crucial in a modern standard of living. Day e.a. (2016) expand on this line of reasoning and explain that energy is a necessity for human capability because certain capabilities require certain energy inputs. The framework developed by Day e.a. (2016) is very similar to that of Sen, but differs in the fundamental aspect that energy is a key requirement of human output.

Capabilities are to be classified into two different categories: “basic” and “secondary”. Basic capabilities refer to the fundamental conditions broadly defined by Sen and Nussbaum, such as “bodily health”. These basic capabilities are then transformed into functionings when they are put into use. Secondary capabilities can be defined in more specific terms. Secondary capabilities precede and materialize basic capabilities. It is important to subject this category to scrutiny because it is at this level where the mechanisms can be identified through which capabilities are realized (Smith & Steward, pp. 229 in Day e.a. 2016).

If one would put these concepts into more concrete terms, a basic capability is to have good health whereas the conditions required to maintain this good health are secondary capabilities. These are factors such as being able to keep warm or cool (which requires energy services for cooling and heating) and being able to prepare nutritious meals (which requires services for cooking). This argument can even be taken a step further into the arena of capabilities because social respect is another capability described in the work of both Nussbaum and Sen. Social respect requires one to be able to wash one’s clothes, which in turn requires energy services such as hot water or a washing machine. It must be noted that the amount of energy that is eventually required does not remain constant over time, but changes as a result of improvements in energy technologies and consumption efficiency. The amount of energy services and fuel needed depends on specific circumstances, such as household size and the local environment. Moreover, the amount of energy required by an individual also changes when amount of energy provided in public locations (e.g. community center) changes.

In sum, there is a correlation to be found between basic capabilities and secondary capabilities and secondary capabilities require energy services. An energy service, in turn, can only be provided if it has an energy supply and a fuel source (figure 2.1). This means that a definition of energy poverty goes beyond simple indicators such as electricity access and starts with the first step of the table: fuel/energy sources. The consumption of these fuel/energy sources (such as biomass and kerosene) can be measured and evaluated.

Figure 2.1: schedule of the connection between energy sources and capabilities

daySource: Day e.a. 2016, pp. 260

  1. A plethora of definitions

Several definitions of energy poverty have been developed over the past several decades. Most of these definitions draw on a variety of indicators which cannot be measured in developing countries. The guidelines of The Energy Indicators for Sustainable Development (EISD) are an example of this, as this report introduces a guideline on sustainable development and defines a specific set of energy indicators. Foster e.a. (2000) has constructed a term called fuel poverty and uses three separate measures on fuel consumption to compare levels of fuel consumption among the poor in Latin America.

The International Energy Association (IEA) defines energy poverty as “the lack of access to modern energy services. These services are defined as household access to electricity and clean cooking facilities (e.g. fuels and stoves that do not cause air pollution in houses) (IEA, 2016). The IEA has expanded on this definition and developed a framework termed as the Energy Development Index (EDI). This measure uses several indicators with the aim of determining the level of progress in developing countries. In specific terms, the EDI considers the following indicators.

  • Per capita commercial energy consumption
  • Per capita electricity consumption in the residential sector
  • Share of modern fuels in total residential sector energy use
  • Share of population with access to electricity.

Source: IEA, 2016, pp. p

The IEA designates the level of electricity access, commercial fuels and modern fuels (as opposed to traditional biomasses) as the most important indicators of energy poverty. Lastly, the Schumacher Centre for Technology and Development draws on the IEA’s definition and converts the previous bullet points into specific indicators. The product is a set of indicators that are related to household fuels and electricity. These indicators include the use of fuelwood, animal dung, charcoal and the level of electricity access among households (The Schumacher Centre for Technology and Development, 2010, pp. 88).

 

2.5 Defining energy poverty

When the fundamentals of capability theory are considered, it becomes easier to justify a direct correlation between energy poverty and specific indicators. The United Nations Development Programme (UNDP) has provided a definition of energy poverty that is based on electricity access and fuel consumption and is the most widely cited model of energy poverty within the discourse. The idea of energy poverty, as formulated by the UNDP, is formulated as: “as the absence of sufficient choice in accessing adequate, affordable, reliable, high-quality, safe, and environmentally benign energy services to support economic and human development” (UNDP, pp. 44). The UNDP then expands on this definition by making a distinction between those that have access to electricity and those that rely on traditional biomass for their energy consumption (UNDP, pp. 44). This definition takes into account that energy consumption is a requirement for human and economic development and allows for the categorization of specific indicators: biomass fuels and electricity access. This means that people with no access to electrical energy draw on a very specific set of fuel sources. As people are lifted out of energy poverty, their energy consumption shifts away from fuel sources such as crop residues, animal waste and fuelwood and toward electricity.

  1. What energy interventions should focus on

 

Ultimately, energy poverty can be reduced through four means of interventions (figure 2.2). First, efficient interventions can have the goal of improving the access to fuel and energy. Factors that are included in this type of interventions are improvement of the affordability and the enhancement of alternative fuels. Second, efficient interventions can be related to improving the efficiency of infrastructure of the energy delivery system. The reasoning behind these interventions is that increased efficiency results in a higher amount of energy delivery with the same amount of energy supply. For example, these interventions include policy reforms that are aimed at improving the efficiency of the distribution and transmission system, especially when these infrastructures suffer from leakage issues. These approaches also include interventions that are aimed at promoting cleaner fuels.

Figure 2.2: energy interventions within the capabilities arena

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Source: Day e.a. 2016, pp. 262

Most approaches that are concerned with developing countries are located on the left side of the diagram (Day, e.a. 2016, pp. 262). However, some interventions in developed countries are situated on the left side of the figure as well. In the United Kingdom (UK) one of the spearheads of energy reform has been the improvement of the efficiency of office buildings, so that energy consumption is reduced. Last, interventions that are situated on the right side of the diagram have the objective of addressing particular needs. These interventions are less applicable to developing countries as they are a lower priority. Instead, these interventions are aimed at improving the circumstances of a group of specific individuals. For example, some policies in the UK provide income supplements for the elderly as thermal comfort is of greater importance for these groups.

2.6 Development and the environment

Although the UN’s Millennium Development Goals (MDG) do not mention access to energy in its quantified targets for addressing extreme poverty, the MDG has several goals which imply energy services. These goals include the goal to eradicate extreme hunger and the goal to improve maternal health. Lastly, the MDG’s seventh goal to ensure environmental sustainability is measured with an indicator that is based on energy use[2]. The UN has also drawn attention to the issue of energy poverty by relating the term to sustainable development and by declaring the year 2012 as the “the International Year of Sustainable Energy for All”.

Sustainable energy is a vital element in the discourse of researchers trying to explain the relations between economy, society and environment (e.g. Redclift 1984, 1987, 1996, Clark and Munn 1986, Redclift and Benton 1994). Literally, sustainable energy is energy production that can last for the foreseeable future. In order for an energy source to be sustainable, it must rely on resources which can continue to accommodate our needs. The combined effects of a certain energy practice cannot significantly damage the environment.

Sustainable development has many definitions. The most widely used definition in the discourse is that of the Brundtland report (1987). Sustainable development is defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs. (Brundtland Commission, 1987, pp. 41)”.

This definition does not provide any specifics but it does deal with two important concepts. First, the concept of needs refers to the essential needs of the world’s poor which should receive overriding priority. Second, the definition deals with the idea of limitations which are set by the state of technology and social organizations. This second concept is particularly important because it highlights the tension that exists between the environment and development. The Brundtland report also highlights the fact that the environment’s ability to meet present and future needs changes over time as technology advances over time. Within this context, the UN argues that the orientation of technology development must be changed to pay greater attention to environmental factors (Brundtland Commission, 1987, pp. 54).

2.7 Energy and development

The objective of energy poverty alleviation has never been addressed in the United Nations Framework Convention on Climate Change (UNFCCC). This lack of acknowledgement among the highest echelons of the decision-making spectrum is somewhat in contradiction to the empirical evidence that places energy access as a fundamental requirement of economic development.

Most reports that do link levels of energy consumption to economic development are based on wider (macro-economic) indicators. This is not without reason, because the connections between energy and economic development become apparent when several macro indicators are connected to the per capita to energy consumption of a country.  Saudi Arabia and Russia, which have similar levels of life expectancy (a shared HDI of 0.78 and a life expectancy of 73.9 and 68.8 years respectively) have similar levels of energy consumption per year (7.9 toe and 6.4 toe, respectively [3]) (table 2.1). The same relationship can be found for less developed countries such as Nigeria and Ethiopia as their lower HDI (HDI of 0.47 and 0.39, respectively) is paired with lower energy consumption (0.7 and 0.1 toe, respectively).

Table 2.1: energy consumption and development indicators for a subset of countries

  HDI Life expectancy (years) GDP per capita ($, PPC) Electricity consumption per capita (kW h) Energy use per person (in tep) Cars (per 1000 inhabitants) CO2 emissions per persion (t)
United States 0.92 78.2 46.612 13.394 7.1 632 19.7
Germany 0.92 80 37.652 7.215 4.0 510 9.8
Saudí Arabia 0.78 73.9 22.747 7.967 6.1 139 16.5
Russia 0.78 68.8 19.940 6.452 4.9 233 11.3
Brazil 0.73 73.1 11.180 2.384 1.3 178 1.9
China 0.69 73.3 7.553 2.944 1.8 35 4.4
India 0.55 65.1 3.366 616 0.5 12 1.2
Nigeria 0.47 51.4 2.367 137 0.7 31 0.7
Ethiopia 0.39 58.7 1.033 54 0.4 1 0.1

Source: Enerdata, 2016

The inference that the energy consumption of a country increases as it develops is further supported by analyzing electricity consumption over time. Figure 2.1 shows the trends in total energy consumption from 1990 to 2014 for the six countries with the highest levels of energy consumption: China, the United States, India, Russia, Japan and Germany. The most significant fluctuation is the increase of China’s energy consumption, with an increase from 1252 Mtoe [4] in 2002 to 3034 Mtoe in 2014 (which equals a change of 7.1 percent per year during the period 1990-2014). During the same period, China’s total GDP increased from 392.51 to 10,352.12 billion US dollars. Similarly, China’s HDI increased from 0.502 to 0.727 during this time (National Bureau of Statistics of China, 2016).

Figure 2.1: Energy consumption for a subset of countries during the period 1990-2014

Source: Enerdata, 2016

Figure 2.2: Energy consumption for a subset of countries during the period 1990-2014

Source: Enerdata, 2016

However, some states have experienced a stagnation or a decrease in energy consumption. Total energy consumption in Ukraine, for example, decreased from 243 Mtoe in 1990 to 103 Mtoe in 2014 (figure 2.2). It is important to note that the relationship between energy consumption and development works both ways, as energy consumption tends to decrease during times of economic decline.

Finding a statistical relationship between energy access and development

There is a statistical connection between the HDI and levels of energy use of a country. This correlation can be found by analyzing datasets of these two factors between 1995-2008, as has been shown by the statistical evidence of Arto e.a (2015) (figure 2.2). Each red dot[5] in the scatter plot connects the HDI to the level of energy use of a certain state. The analysis suggests that nearly all states that have been assessed as having a high HDI have a high energy consumption level. However, there are exceptions to this trend as is signified by the horizontal spread of the dots in the scatter plot. In addition, the connection between HDI and energy consumption is not linear. Instead, it tends to curve as energy consumption increases. This suggests that HDI increases require a certain threshold of energy consumption. Once this threshold has been passed, the effects of energy consumptions increasingly flattens until no connection can be found between the two factors.

Figure 2.2: worldwide primary energy consumption in gigajoules [6] per year and the HDI level

Source: Arto e.a., 2015

It must be noted that there are four factors that bring nuance into this argument and weaken the link that is found between energy consumption and development. First, the structure of the economy affects the relationship between HDI and energy consumption. As an economy grows its service sector, for example, energy consumption will decrease. This particularly applies to developed countries which are situated on the right (figure 2.2).

Second, energy consumption is also affected by cultural differences. A large literature focuses on the connections between culture and consumption and concludes that cultural practices are central to the structuring of energy consumption (Lutzenhiser (1992), Durning (1992), Lutzenhiser & Hackett, 1993). Lutzenhiser (1992), for example, explored this connection by comparing the results of investigations of energy use behavior in Fukuoka, Japan, and Oslo, Norway. Lutzenhiser (1992) explains that there are several cultural differences that heavily affect conservation behavior and energy consumption, such as bathing routines in Japan and attitudes toward energy intensive space heating in Norway (Lutzenhiser, 1999, pp. 797).

Third, energy consumption is affected by differences in organizational behavior (the acts of corporations and governments) (Gardner and Stern, 1996; Allen, Chapter 3). Last, the connection can be distorted for energy exporting countries because of energy subsidies (which is particularly true for energy subsidies on fossil fuels). The measured energy use of Saudi Arabia is higher than that of France even though Saudi Arabia’s HDI levels are lower. The second factor that mitigates this connection is that levels of energy consumption are not only the product of development but also the product of government policies. This explains why the energy consumption of the United States is significantly higher than any other state, as this difference cannot be explained by looking solely at levels of socioeconomic development.

Energy access and socio-economic development

The previous section provides evidence to support the claim that modern energy is one of the most basic requirements for development. But this does not mean that all kinds of energy are of equal importance to the economy. The onus of this research is on electrification levels and unelectrified areas are often remote and rural. When rural areas gain access to energy, the effects are often mostly expressed in socio-economic terms. For example, when rural communities are lifted out of energy poverty, this is likely to have a larger effect on public health than on the economy. Kanagawa & Nakata (2007) developed an energy-economic model of rural areas in India to explore these linkages further, applying both opportunity cost for using fuelwood[7] and exposure to Respirable Suspended Particulate Matter (RSPM, further explained in 2.7). The research found that there is a positive relation between the opportunity cost and the average RSPM exposure of women in the remote, rural areas of India.

The effects of energy access in socio-economic terms are quite complex, but can be summarized as follows. Energy access (rural electrification & renewable energy) has a positive effect on education, income, health and the environment. In turn, these factors have a positive effect on each other (figure 2.3).

Figure 2.3: the effects of energy access on several socio-economic indicators

Source: Kanagawa & Nakata (2007), pp. 320

The Department for International Development (2002) provides further evidence that supports this correlation and points out that there is a connection between energy access and the Millennium Development Goals. Access to modern energy services can eliminate the need to collect fuelwood. The goal to promote gender equality and women’s empowerment, for example, can be partly achieved by freeing up women from gathering fuelwood and cooking with polluting fuels.

Most of the poor meet their energy demands by collecting fuelwood and other biomasses. This is a relatively cheap endeavor in cash terms, but it is much more expensive in terms of the time it takes. The patterns of time use of typical South Indian villages show that the absence of modern energy services results in a heavy burden. Typical families spend 2-6 hours each day collecting fuelwood and there are reports of women who must camp overnight because the distances they need to cover to get fuelwood are getting longer (Department for International Development, 2002, pp. 9).

There are many socio-economic effects of rural electrification. One other immediate benefit is that it can enable vaccination and medicine storage by a refrigerator (improve public health). It can also power lighting appliances which enables to study at night (improved education). There are reports of this positive effect in Peru, Vietnam and several countries in Sub-Saharan Africa (the World Bank, 2010 pp. 45).

2.7 Why energy poverty is important: linking energy poverty to health

The paragraph above touches upon some of the positive effects of energy access on public health. This is explored further in this section. The objective of energy poverty alleviation is not just important because energy is necessary for growth. It is also important because there are there are several connections between health risks and energy poverty. Primary health risks are associated with excess cold which may form a threat to life itself. This connection was first reported in 1841 when an excess of winter deaths (EWD) was discovered. Recent empirical evidence suggests a similar connection, as a decrease of 1 degree Celsius can attribute to an increase between 1.72 and 3.3 percent of cardiovascular, respiratory, and cerebrovascular related deaths (Analitis e. a., 2007, pp. 1397). It must be noted that there is evidence that shows a downward trend in EWD thanks to changes in housing conditions, social policy and health care (Iparraguirre & Goodwin, 2015, pp. 137). It must also be noted that EWD is highest in developing countries (Analitis e.a., 2008, pp. 1406).

More important to the scope of this research is the fact that most of the adverse effects of energy poverty are related to biomass fuel emissions. Burning biomass fuels in household stoves are thermally inefficient and only make use of a small portion (9-12 percent) of the energy capacity of the fuel source (Lohan e.a. 2015, pp. 92). Unfortunately, biomass consumption is not just inefficient but also unhealthy. This is because biomass consumption carries a disease burden as the combustion of these traditional fuels results in the emission pollutants such as carbon monoxide.

Many of the Indian population use simple household stoves, or chulha’s with no chimney to direct the smoke into the open air. This means that even activities such as cooking indoors are dangerous, because prolonged exposure to the emitted toxic particles is associated to an increased risk to several diseases. This is especially true when solid biomass fuels are used as the fuel source. The empirical evidence reveals a connection between household stove use and acute lower respiratory infection (ALRI) (Smith e.a. 2000), chronic obstructive pulmonary disease and lung cancer (Mumford 1987).

The health of women and young children is affected the most because they are exposed to the poor air quality for the longest periods of time. Approximately 70 percent of all Indian households (about 160 million households and about 770 million people) depend on polluting household stoves that depend on solid fuels such as wood or coal (WHO, 2016). For the Indian population, this means that about one million premature deaths occur per year because of cook fuels (Smith & Sagar, 2014, pp. 411).  The potential market in India for cleaner energy is the largest in the world.

The fuel ladder and health

The final correlation that must be highlighted is the relationship between certain fuel types and air pollution because not all fuel types are equally harmful to the health of the user. The fuel ladder is a framework that has been used for many years (e.g. OTA, 1992) and allows a research to tie conclusions to changes in the consumption of certain fuels. The fuel ladder developed by Smith & Sagar (2014) divides population groups by income levels and connects these groups to the fuels that they respectively use most to power their household (figure 2.3). A high dependency on traditional biomass fuels is a hallmark of energy poverty in developing countries as those that live in energy poverty rely heavily on fuels such as agricultural residues and animal waste.

In the case of India, most of its population relies on fuelwood, such as small trees and brushes found along roads and across fields. Solid biomass fuels are particularly dangerous and among these solid fuels fuelwood has the most substantial effects on India’s population because a big portion of the population depends on it and because its air pollution is relatively harmful (figure 2.3).  Coal is used by a small fraction of the population, with only 10 percent making use (most of these users reside in remote eastern states) (Smith & Sagar, 2014, pp. 413).

Fuels on the upper portion of the schematic are relatively clean. Liquefied petroleum gas (LPG) is the first commercial fuel that is relatively clean and used by many, with approximately 600 million of the Indian population using it for cooking purposes. Piped natural gas is now available in many cities, although many in India’s rural areas lack the infrastructure to receive this fuel. Electric cooking is also only used among a small fraction of the population, but is expected to quickly increase as electricity access increases. It is important to note that most income groups rely on more than one fuel for their energy consumption, and change their energy mix as they move along the income curve.

Figure 2.4: household air pollution, fuel types and increasing prosperity in India’s households for 2012[8]

C:\Users\Young Davis\AppData\Local\Microsoft\Windows\INetCache\Content.Word\2016-05-01 (5).pngSource: Smith & Sagar, 2014, pp. 413

3. Electricity Reform in India: a brief history and the structure of the Indian Electricity Act 2003

 

This chapter provides a brief history of energy reform in India. It explains that the objectives of the Indian Electricity Act (EA) of 2003 are not entirely novel, but can be traced back to the first efforts of power sector privatization of the 1990s. Second, this chapter lays out the changes that the EA has tried to implement and subjects these changes to the critique found in the literature.

3.1 A history of reform

 

The Indian electricity sector has a diverse and complicated history when it comes to ownership structure as it has gone from private sector to the public sector and then back to the private sector. The drivers of change have come from both home and abroad and this has complicated the process of reform. Efforts to change India’s electricity sector have also been impeded by the fact that energy policy is on the concurrent list[9] in the Indian constitution. This means that the legislative authority of electricity is granted to both the central and state governments[10].

Post-independence: from private sector to nationalization

When India gained independence in 1947 its generating capacity amounted to approximately 1362 MW, most of which was generated by coal based and hydro power plants. During this time the electricity supply was the domain of the private sector. Generation and distribution was carried out by a single private firm named Calcutta Electric, which did not include rural areas in their area of operations and limited the supply of electricity to urban areas.

The structure of India’s electricity sector changed after reforms were introduced in 1948 in the form of the Electricity Supply Act of 1948 (figure 3.1). This legislation caused a shift away from the monopoly model and moved the power sector to the public domain. States could now create their own electricity generating firms in the form of state electricity boards or SEBs. These SEBs are vertically integrated entities which are responsible for power generation and the transmission and distribution (T&D) of electricity. These SEBs sell directly to consumers (i.e. their revenue is directly from sale of power). Other revenue from the SEBs comes from energy subsidies of the Central Government (Ministry of Power, New Delhi, pp. 6). SEBs were to operate alongside other state-owned corporations, such as the National Thermal Power Corporation and the National Hydroelectric Power Corporation. It did not take long for these legislative reforms to take effect as by the end of the 1950’s all state governments had established an SEB[11].

External pressures and a stronger push for energy reforms

 

Energy has not only been high on the agenda of India’s central government. Pressures for energy reform have also come from abroad and the World Bank has a diverse history of continued involvement. Before 1993, the World Bank’s reform efforts mostly came in the form of conditional loans. The aim of these loans was to support the Indian Government by providing basic infrastructural requirements and expanding productive capacity. The policy was exclusively geared toward improving economic and financial stability and in this respect, it aligned well with the World Bank’s principle of mere economic interference. For example, the National Thermal Power Corporation (NTPC) and the National Hydroelectric Power Corporation (NHPC) received approximately 3 billion US dollars between 1970 and 1991 for the construction of large power plants and the expansion of generation capacity (World Bank, 1999, pp. 9, appendix c). The strategy was for the National Thermal Power Corporation to become a model which the SEBs could emulate (the World Bank. 1999, pp. 2).

In the 1980s, the World Bank started to support the SEBs generation expansions as well. Lending in the coal sector was focused on increasing the relative amount of coal produced through low-cost open-pit mining. Other projects in the oil and gas sector had a similar goal and were aimed at the physical infrastructure required to expand the production capacity (the World Bank. 1999, pp. 4, appendix c).

Power sector crisis and restructuring in the 1990s

 

During the time of the green revolution, power for irrigation was so heavily subsidized

that it was sometimes supplied at no cost (Srivastava & Rehman, 2006, pp. 648). The goal was to ensure an increase in agricultural yields, but this also resulted in the SEBs incurring enormous losses, which in turn resulted in a default on many of the World Bank loans. It is no surprise that the power sector in 1991 was in poor financial condition. The reported losses were approximately 40 billion rupees (0.85 billion USD), which was about 0.7 percent of the gross domestic product at the time. The losses in T&D were high too, as the amounted to approximately 23 percent and the load factor was a mere 54 percent.

After a financial crisis, the reform of the entire sector became inevitable. In 1990-91 a severe balance of payment problem brought a halt to all short-term loans from several international banks. The Indian government had no other choice but to request for assistance from the International Monetary Fund (IMF). During the following years, several measures were implemented to adopt the sector to the worsening economic conditions (figure 2.3). The rupee was devalued to stabilize the Indian economy and the IMF decided on a stable supply of loans. Other measures included liberalization efforts (such as the elimination of export subsidies) and a shift from import quotas to tariffs (Chong, 2005). In addition, 100 percent foreign ownership of electricity firms was allowed (figure 3.1).  The idea was that these changes would encourage foreign direct investments and private participation in the electricity sector. The policy was effective as state owned enterprises were being privatized at a quicker pace, which included enterprises in the electricity sector (Ghosh 2002).

During the following years further policy reforms aimed at private participation were introduced. From 1998 onwards, the Indian government tried to push international Independent Power Producers [12] into a commitment of investments in new generating capacity. However, the levels of private investments remained lower than expected because of a lack of security for investment recovery. The SEBs had a poor reputation in terms of paying in a timely manner and firms were also put off by the past experiences with India’s ineffective multi-level government, which ultimately caused foreign firms to remain cautious to re-enter the market (Lock, 1996, pp 79).

Figure 3.1: Policy reforms in India during 1947 -2014

C:\Users\Young Davis\AppData\Local\Microsoft\Windows\INetCache\Content.Word\2016-05-04 (1).png

Source Lock, 1996

Results

 

The various reform efforts of the 1990s did not lead to significant increases in the generating capacity provided by private firms. In 2001, ten years after the amendments that allowed private investments were introduced, only 9.7 percent of the total nationwide power generation were produced by private companies (Government of India, 2016). The private participation in the thermal generation was especially expected to increase, with a planned increase to 17038 MW by 2002. However, only 4,975 MW of private sector participation was realized, falling short of the objective by over 70 percent. Results were equally disappointing for hydropower, as only 86 MW of private sector participation in the hydro-electric generating capacity had been realized in 2002, which only accounted for 16 percent of the original objective[13] (table 3.2).

Table 3.1: Central, state and private sector participation targets and achievements for hydro, thermal and nuclear energy in India

    Ninth  Plan (1997-2002)    
Type Target Achievement (MW)
  Central State Private Total Central  State Private Total
  Sector Sector Sector Sector Sector Sector
Hydro 3,455 5,815 550 9,820 540  3,912 86 4,538
Thermal 7,574 4,933 17,038 29,545 3,084  5,538 4,975 13,597
Nuclear 880  – – 880 880  – – 880
Total 11,909 10,748 17,588 40,245 4,504  9,450 5,061 19,015

Source: Government of India, 2016, pp. 901

The relative participation in the electricity sector can also be evaluated by looking at an indicator called the Indian plant load factor[14]. During the period 1997-2002, this figure had only increased slightly (from 71.2 to 74.4) (Government of India, 2016, Appendix a).

3.2 The Indian Electricity Act 2003

 

The Electricity Act, 2003 is widely regarded as a sea-change in Indian energy policy. By implementing the EA, India focused its energy agenda entirely toward electricity. In fact, other energy sources such as gas are not mentioned in the act (Electricity Act, 2003).  The primary goal of the act was universal electrification (i.e. supply of electricity to all area’s). This would be achieved by providing open access and promoting competition in electricity generation, transmission and distribution. Specifically, the act allowed each state to set up state electricity regulatory commissions, known as SERCs (not to be confused with the Central Electricity Regulatory Commission). These commissions are responsible for formulating the tariff policy (the tariffs charged to different consumer groups and the tariffs of intrastate transmission) in consultation with the central government. This means that there is a functional separation of the tariff making system. This reform was successful in terms of implementation as by March 2003 22 states had formed SERCs and 13 of them had passed tariff orders (ICRAb 2003).

Moreover, the EA resulted in the establishment of a new public authority called the Central Electricity Regulatory Commission (CERC). The CERC is tasked with facilitating open access to the transmission system and further increasing private participation. Specifically, this objective was defined as “an introduction of non-discrimination, open access in the transmission sector” (figure 3.1). The EA was enacted to reform the electricity sector further by pushing for increased competition. The second main objective is to alleviate energy poverty and supply electricity to all areas of the country (Electricity Act, 2003, section 3, 4, 5 and 6).

Changes

 

The EA does make several significant changes to the energy market in India as it helped paved the way for several radical reforms. First, it caused a shift away from the single-buyer model and opened the market for private captive generators [15] (point 1, table 3.1) [16]. There is empirical evidence that suggests that captive growth in India has positive outcomes as this growth can cause the generating capacity to grow and the competition in the power market to increase. After the EA, the share of captive power generators had been increasing rapidly and in 2008 the total generating capacity with plants that are greater than 1MW in size was approximately 25 GW (Shukla, e.a. 2004).

Second, open access (point 5 and 6 table 3.1) is a major focal point of the legislation. Open access means that a consumer can get its electricity from any generating company of his or her choice. The idea is that this ultimately leads to increased competition and the supply of reliable electricity at an affordable price. The Electricity Act 2003 has also introduced open access to T&D system where any one that has surplus power or one who has requirement of power can pay applicable T&D charges and use the T&D for sale directly to consumers or purchase directly from generators (Allagh, 2010, pp. 10).

Third, the EA aims at further reducing the losses incurred in T&D by making the monitoring of supplied electricity mandatory and by making the penalties related to the theft of electricity more stringent (point 10 and 11)

Table 3.2: Summary of the policy reforms of the Electricity Act, as formulated by the Government of India, 2003

1. No license is required for generation and captive generation has been freely permitted. Hydro projects exceeding the capital cost notified by the central government however, need concurrence of central electricity authority.

2. No license required for generation and distribution in notified rural areas.

3. Transmission utility at the centre as well as state level, to be a government company-with responsibility for planned and coordinated development of transmission network. Provision for private licenses in transmission.

4. Trading, a distinct activity recognized with the safeguard of the regulatory commissions being authorized to fix ceilings on trading margins, if necessary.

5. Open access in distribution with provision for surcharge for taking care of current level of cross subsidy with the surcharge being gradually   phased out.

6. Distribution licensees would be free to undertake generation and trading.

7. The state governments are required to reorganize the SEBs. However they may continue the SEB as state transmission utilities and licensees for such time the state and central government agree.

8. Setting up of the state electricity regulatory commission made mandatory.

9. An Appellate tribunal to hear the appeals against the decision of the CERC and SERCs.

10. Metering of all electricity supplied made mandatory.

11. Provisions relating to theft of electricity made more stringent.

12. For rural and remote areas stand alone systems for generation and distribution permitted

13. Thrust to complete rural electrification and provide for management of rural distribution by panchayats, cooperative societies, non-governmental organizations, franchises, etc.

Source: Ministry of Power, Government of India, 2016

 

3.3 Structural shortcomings

The EA can be connected to the theories on energy reforms. The main objectives of the reform align with Day e.a’s (2015) work on energy interventions. As explained in paragraph 2.5, efficient energy interventions should first and foremost aim to improve the access to fuel and energy. Several points emphasize this objective, such as point 1, 2, 3 and 5. Several other points are aimed at the efficiency of infrastructure of the energy delivery system, with a special emphasis on the improvement of the T&D system (point 3, 7, 8 and 10).

However, the evaluation of the EA’s structure has exposed several of its shortcomings.

One major issue is the increased bureaucracy brought about by the new SERCs and CERCs.


[1] Existing gas capacity was approximately 8 percent of total capacity

[2]  Indicator 27 of the MDG’s is “the energy use (kg oil equivalent) per $1 GDP (PPP)”. This indicator measures the GDP $1 GDP (PPP) per unit of energy use (kg oil equivalent) (IEA, World Bank).

[3] t of oil equivalent (toe) per person per annum

[4] Million tonnes of oil equivalent (Mtoe): This is a unit of energy defined as the amount of energy released by burning a million tonnes of crude oil. One tonne of crude oil is approximately 42 gigajoules, dependent on crude oil type.

[5] The bigger the dot, the bigger the population of the country

[6] A gigajoule is equal to one billion joules

[7] Opportunity cost: the use of limited resources such as time and money reduces the opportunities for alternative use of these resources

[8] The vertical axis shows the relative emissions per meal of combustion particles. Fuels close to the x-axis are the most harmful as they emit the highest number of combustion particles.

[9] The Concurrent List or List-III is a list of 52 items in the Seventh Schedule to the Constitution of India. Electricity is listed as number 38.

[10] The central government of India is granted responsibility through the Indian Electricity Act (1910); the Electricity Supply Act (1948); the Electricity Regulatory Commissions Act (1998); and the Electricity Act (2003)

[11] The current SEB generation capacity comprises almost 60 per cent of India’s total generation capacity.

[12] An independent power producer (IPP) is an entity that generates and sells electricity to utilities and end users for sale to utilities and end users. They include private corporations and cooperatives

[13] This objective was laid out in the Ninth Plan by the Government of India, one of the Five-Year Plans of India

[14] Plant load factor: this is an indicator of operational efficiency in thermal systems. The plant load factor measures average capacity utilization (i.e. the output of a power plant compared to the maximum output it could produce).

[15] Captive power plants can be considered as “power plants commissioned by the industries for their self-consumption: ( Shukla e.a. 2004, pp. 6)

[16] A captive generators is “ a power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such cooperative society or association” (Electricity Act, 2003).

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